How To Take Advantage of High Volatility in Crypto

Volatility refers to the tendency of prices to fluctuate over time. For crypto derivatives, where traders engage in managing leveraged positions and complex financial instruments, market volatility creates price movements that allow traders to buy low and sell high, capitalize on arbitrage opportunities, and implement a wider range of trading strategies designed to extract profit from market fluctuations. While volatility can challenge the investment strategies of the unprepared, seasoned traders recognize it as a catalyst for profit and a source of potential gains that can far outweigh the risks, when equipped with the right knowledge and tools.

Factors Contributing to Volatility in Crypto Markets

• News and Events: Announcements of new regulations, major partnerships, or technological breakthroughs can trigger rapid market sentiment shifts—and price movements. For example, the approval of the first Bitcoin ETF in the US in October 2021 led to a surge in buying activity, pushing the price of Bitcoin to a six-month high of over $64,000 — just shy of its all-time peak.

• Market Psychology: Market sentiment plays a pivotal role in driving price swings. Herd mentality can create self-fulfilling prophecies, where positive sentiment fuels further price increases and negative sentiment exacerbates price declines. For example, it can be seen in how social media trends and influencer endorsements can trigger rapid price movements, as traders react quickly to perceived shifts in market sentiment.

• Liquidity: The cryptocurrency market exhibits lower liquidity potential than traditional financial markets, giving large buy or selling orders a more pronounced impact on prices, amplifying volatility. A large sell order in a low trading volume market could easily overwhelm the available buy orders, causing a sharp drop in price. Conversely, in a highly liquid market like that of Bitcoin (BTC), large orders are less likely to cause drastic price disruptions.

• Technological Developments: The uncertainty and anticipation surrounding Ethereum Merge, a major upgrade to the Ethereum network, led to increased fluctuations in the price of Ether (ETH) in the months leading up to the event. The Merge transitioned Ethereum from a proof-of-work to a proof-of-stake consensus mechanism, which led to a 99.95% reduction in energy consumption, improved security through distributed consensus, and the potential for increased scalability through sharding, among other implications.

Trading Strategies for Volatile Markets

• Day Trading: Intraday price movements — entering and exiting positions within a single trading session — can supersede potential pitfalls of HODLing in times of market volatility, using technical analyses, chart patterns and indicators to identify short-term opportunities. Trading indicators like moving averages and Bollinger Bands can identify potential entry and exit points for a short-term trade on a perpetual futures contract. If the price breaks above the upper Bollinger Band, it could signal an opportunity to enter a long position, while a break below the lower band might indicate a short-selling opportunity.  

• Swing Trading: Traders can leverage short-term price swings by identifying trends and cross-referencing technical indicators (like price action) to pinpoint entry and exit points, effectively riding price fluctuations. If the price of your mark bounces off a support level, they can choose to enter a long position until a resistance level is achieved or when the upward momentum shows signs of weakening.

• Arbitrage: Arbitrageurs exploit price discrepancies between different exchanges or markets. They buy an asset at a lower price on one exchange and simultaneously sell it at a higher price on another, profiting from the difference. 

• Scalping: Scalpers leverage on small, frequent price fluctuations, aiming to profit from minimal changes within a short timeframe — often just minutes. They capitalize on fleeting market inefficiencies and execute a large number of trades throughout the day. For example, a scalper might monitor the order book for a Bitcoin perpetual futures contract and identify short-term imbalances between buyers and sellers. They might then quickly buy small amounts of contracts when they perceive an excess of buy orders and immediately sell them when the price ticks up slightly, profiting from the small price difference.  

• Using Volatility Indicators: Traders often incorporate volatility indicators, such as the Average True Range (ATR), the Bitcoin Volatility Index (BitVol), and Bollinger Bands, into their strategies for informational purposes, and to gauge market dynamics and make strategic decisions.

  • ATR: measures the average range of an asset's price fluctuations over a defined period, with a rising ATR suggesting increasing volatility. 

  • BitVol: tracks the implied volatility of Bitcoin options, providing insights into market expectations of future volatility.

  • Bollinger Bands: plot standard deviations around a moving average, visually representing price volatility, with wider bands indicating higher volatility.

Methods for Managing Risks in Volatile Markets

• Stop-Loss Orders: Stop-loss orders automatically exit a trade when the price reaches a predetermined price level, preventing further losses if the market moves against the trader's position. For example, a trader who buys Bitcoin at $30,000 might set a stop-loss order to automatically trigger at $29,000, limiting the trader's loss to $1,000 if the price of Bitcoin drops to that value. 

• Position Sizing: By carefully sizing their positions, traders can control their risk exposure and avoid overleveraging, which can lead to substantial losses in volatile markets. For instance, a trader with a $10,000 account balance might decide to risk only 1% of their capital on any single trade, limiting their potential loss to $100. 

• Diversification: Diversifying across different cryptocurrencies and asset classes can help mitigate risk. When one asset experiences a downturn, others may remain stable or even increase in value, cushioning the overall impact on the portfolio. A trader might diversify their portfolio by investing in a mix of Bitcoin, Ethereum, stablecoins, and even traditional assets like stocks or bonds.

How to Trade Cryptocurrencies on Flipster

1. Sign up for an account on the Flipster website or by downloading the Flipster app (Android or Apple).

2. Click the [Trade] tab.

3. Search for your preferred cryptocurrency and click on it.

4. Select the leverage (up to 100x).

5. Select either a Trigger Order or Market Order.

6. Enter the amount of coin you want to trade or choose a percentage of your available funds.

7. Once you have confirmed the details, click the [Long] or [Short] button to open a position.